Choosing the best structure for your business can either be one of the most frustrating or easiest decisions that you will need to make in the early stages of starting your business. One of the ways to make the decision a lot simpler is to fully understand the key differences between choosing to incorporate your business or not.
I am going to touch on a few of the main differences within this blog as this is one of the most common questions that I am asked daily.
I want to start by saying if you want to keep it simple self-employed may be the best choice for you. Being self-employed is super easy in the sense that you just keep track of your income and expenses, submit a tax return for each tax year and pay any tax liability by the 31 January following the tax year.
You only need to worry about income tax and not corporation tax and to get things started you simply need to register for FREE within three months of trading or no later than 5 October in the second tax year. The biggest thing when being self-employed is ensuring that you keep all your receipts and invoices or other records of sales.
Your accounting period runs 6th April – 5 April each year but if you complete your accounts to a 31 march year-end that is absolutely fine too. You are liable to income tax and this is calculated on your profits for the accounting period.
Super easy right, and it stays like this until you get to a point where you are starting to hit the VAT threshold! If you are close to reaching the VAT threshold don’t worry another blog is coming very soon.
So after all that, you may wonder why people consider going Ltd. Remember at the start of this blog I said the easiest way to make a decision is to fully understand the differences between the two so don’t write off incorporating your business just yet.
Below are some of the key advantages to incorporating a business and making the move to registering for a small fee as a Ltd Company via Companies House.
Limited Liability
This is one of the things that sway people to incorporate, after the tax savings of course. Limited companies are their own legal entity. This means that any contracts, tenders, liabilities, etc belong to the company. This is attractive as it offers the business owner limited liability should the company get into financial difficulty, although HMRC do have the powers to lift the veil of incorporation in some instances.
Professionalism
Having a registered company can look more professional to potential suppliers and customers. This makes the business look more attractive which is never a bad thing. I mean it’s amazing watching the power shift in a room when somebody introduces themselves as a director right? I guess it just means potential customers and suppliers may take the company a bit more seriously if you have invested time and money into incorporating your business and you want to be taken seriously.
Finance Options
It is often said to be easier to obtain business finance for a registered company than it is for sole trade businesses. I guess that depends on the company and the lender. It is true though, that there are other ways to source finance for a company such as issuing shares.
Tax Savings
Okay, so the juicy stuff! Everybody loves a tax saving, so this is another key benefit to registering as a limited company, particularly if you are a higher rate taxpayer as the rates of corporation tax are lower than the rates for personal income tax. You also have various options to withdraw money from the company to utilise the tax savings available to you, whether that is by paying yourself a salary up to the personal allowance (£12500 for the 2019/20 tax year), utilising the dividend allowance or keeping money in the company and paying corporation tax only. Get in touch today to find out the best way you can extract money from the company.
Business Name
This is one of the ohhhhh ahhhh benefits I find when I am speaking with my clients. As a sole trader, you have no rights to your chosen business name unless you pay to trademark the name, which has its costs. The benefit of registering as a limited company means that nobody else can register a business with the same name. Some people register a company to secure their chosen business name and then the company is kept dormant until such a time that they wish to trade under the Ltd Company. There are still instances where trade mark is still worth while so do research to ensure you do the best for your business and brand.
Succesion
Another ohhhhh ahhhhh moment is the ability to sell a company or pass this on to a relative or business partner. This is a lot simpler to do with a registered company. Sole traders are the business so when they go the business goes. This is something I try and encourage my clients to visualise when they are making their minds up. It’s often something that start-up sole trade businesses are not prompted to think about this in the hustle and bustle of everyday trade. However, when setting up a limited company this is often considered early on when setting up a registered business with more than one shareholder, or when looking at selling the business at a later date.
So there you have some of the benefits to registering as a Ltd company. As with everything you need to take the bad for the good and this is true when it comes to registering your business as a Ltd company. The administrative burden is a lot more than that of a sole trader business. There are more accounts to file to HMRC and Companies house and the bookkeeping and final accounts have to be drawn up to a professional standard. Accountancy costs will also be higher for a Ltd Company because of this. The tax savings may be a good trade-off for this, so it isn’t all bad.
Lots to think about and a really important decision to make for your business. If you would like any other information please do get in touch.
Every business is different so what works for one business owner, may not be the best route to take for another. Gov.uk has lots of information available for free.
Friendly disclaimer: The information contained in this article is for guidance and information purposes only. It should not be relied upon as full and complete accounting, tax or legal advice. For specific advice relevant to your own situation please speak to Ria-Jaine MAAT or another professional direct.
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